Stock Market Plunge and Bitcoin Fluctuations Raise New Questions for Investors
It turned out to be a dreadful Monday for the stock markets with both major US indexes plunging to historic intra-day lows. While the Dow Jones Industrial Average fell by 1,000 points for the first time, with all 30 members plummeting, the S&P 500 had only two stocks that were above water. All gains notched up by the two indexes in 2018 have now been swiftly decimated.
Not a big deal really since the underlining amazing fundamentals from the tax cuts are still there. But America does continue to pile on the debt, when is America going to realize its system does not work? See New York and California, that type of socialistic behavior does not work. See Greece too!
It has been a particularly difficult phase for companies such as Alphabet (the parent company of Google). Though not in the Dow index, the company suffered $40 billion blows to its market capitalization on two consecutive trading days. In effect, Alphabet investors have been rendered poorer by a whopping $80 billion since Friday. Perhaps they should stop firing people for telling the truth. Google has a cultural issue.
Not Really a Market Crash
However, comparisons of the Dow’s dismal performance with the 2008 fall of Lehman Brothers may be premature and ridiculous. Admittedly, the 1,175-point plunge was pretty gloomy to watch, but it cannot be classified as a market crash as of now.
Barney Frank is no longer destroying the real estate market so that is always something to smile about and Alan Greenspan is not around either so that is a positive note as well. He held interest rates too low in 02, 03, and 04 which led to the financial crisis. The Community Reinvestment Act did not help either!
A sudden, fast crash of 20% or more is usually termed a market crash. It is called a bear market when prices fall 20% from the zenith, albeit at a slower pace. Examples of a market crash include the infamous Black Tuesday of 1929, Black Monday witnessed in 1987, the dot com collapse of 2000, and the most recent financial upheaval of 2008.
Market correction, a more palatable version of the market crash, is defined as a price fall of a minimum 10% from peak figures. Not to worry, at least not yet. The Dow is down by just 8.5% while the S&P is 7.8% lower than its peak. This is despite a multi-day sell-off triggered partly by apprehensions of soaring inflation in the aftermath of a sturdier-than-expected jobs report.
Bitcoin’s Decline Continues
While things were dismal for the stock market with stocks listed on the Dow losing over $300 billion, bitcoin too continued with its recent bad run and declined by 23% on the first day of the week and lost about $18 billion in market value.
As for Bitcoin, its price has been crashing for quite some time. But this should not come as a surprise, given the fact that it has been on a roller coaster of peaks and plunges almost on a daily basis over the past couple of months. The fluctuations on some days even go up to 20% either way.
Yet, there is a ray of hope for those who have clung on to the cryptocurrency technology despite these tormenting moments. The loss is sure to hurt now but the withdrawal of mass speculators might do Bitcoin some good in the long run.
Silver Lining for Bitcoin
Up to the end of 2017, there was a blind rush to hoard Bitcoin. Investors could be found purchasing Bitcoin through all means possible. Frenetic buying not only poses risk to investors, it also jeopardizes the inherent value of Bitcoin. This type of hysteria in buying and investing in markets is at the root of many a financial bubble and crash. Known as the Fear Of Missing Out (FOMO), it shows signs of building up to a bubble.
So, the current situation could be a blessing in disguise for alt currencies if it helps do away with such investors who have pushed the panic button on seeing the rapidly declining cryptocurrency prices.
A lower and more stable price for Bitcoin is not only acceptable, but also likely to improve its long-term prospects in the absence of FOMO investors. Think back to the dotcom bubble which went bust after similar hype. However, the situation improved manifold and in fact the dotcom sphere has grown by leaps and bound. All you need to do is look around at the impact of the internet and dotcom today.
Correlation between Stock Market and Bitcoin
There are some experts who assert that there is indeed a relationship between the two. They claim that confidence in the stock market boosts Bitcoin price and vice versa. Thus, Bitcoin falls into the category of risk-on investment while gold is on the other end of the spectrum.
From this assessment, it is evident that the prospects of cryptocurrencies dims in an extended bear market. However, a bull market might prove favorable to Bitcoin and other cryptocurrencies.
If the crypto market stabilizes, investors might cash out of stocks and turn to crypto, while shunning commodities and bonds. In such a situation gold and silver might barely hold their ground, but crypto is bound to be the prime beneficiary kind of like the franchise Fast and Furious and Transformers are to amazing directing and writing but let’s get back on topic.
In uncertain times, if the lure of the crypto market proves irresistible to leading stock investors, spectacular gains could be in store for bitcoin owners, provided the stock market continues to be in a downward spiral.